The article is written by Susmita Kundu. The article provides a detailed analysis of the “Group of Companies Doctrine” in Arbitration Proceedings along with a case analysis of the Supreme Court’s recent Landmark Judgement “Cox & Kings Ltd. V. SAP India Pvt. Ltd”; It elaborates on the factual background, facts, issues, judgement of the Court, opinions of the judges, and the laws applied in the said case.
Introduction
It has been noted that due to the increasing complexity of commercial transactions nowadays, third parties who have not signed a contract may still benefit from and be bound by its terms in certain situations. As a result, Arbitral Tribunals and courts in different countries have found it necessary to require such non-signatories to participate in arbitration based on various grounds like apparent agency, piercing of corporate veil, alter ego, third-party beneficiary, and estoppel. Among
these grounds, the Group of Companies Doctrine has attracted considerable attention, especially in the French legal system. This doctrine allows Arbitral Tribunals and courts to extend the arbitration agreement to companies within a group related to the main contract, under specific circumstances. The Group of Companies Doctrine appears distinctive in its origin and application within the realm of arbitration.
The Supreme Court of India introduced the doctrine in the notable case of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. 1 in 2013. Since then, the Supreme Court has applied this doctrine in various cases, sometimes deviating from its original purpose and structure. Consequently, in the Cox and Kings Ltd. v. SAP India (P) Ltd. 2 case, the Supreme Court has decided to reexamine the doctrine with a larger group of judges to understand its basis, application, and form within Indian arbitration law.
Meaning and Origin
In the year 1984, the idea of the doctrine was first introduced in the Dow Chemical v. Isover Saint Gobain 3 case explained by an ICC tribunal. According to this case, a party that had not signed an arbitration agreement could still be legally obligated by it, but only in certain situations.
The Group of Companies Doctrine is based on the concept that an arbitration agreement can extend beyond the
signatories to include related entities within the same corporate group. It assumes that there is a shared intention among these entities to be bound by the arbitration agreement, even if they did not sign it. Here factors like a direct relationship, common subject matter, and signatory and non-signatory involvement in contract negotiations are also considered. This principle is recognized in legal systems like Switzerland, Germany, England, Singapore, and the United States.
Furthermore, the Group of Companies Doctrine relies on the consent-based theory, which is used to determine the true intention of parties to involve a non-signatory in an arbitration agreement. Various consent-based theories like agency, novation, assignment, operation of law, merger and succession, and third-party beneficiaries have been utilized in different regions to include non-signatories in arbitration agreements.
Application of the Doctrine in India
In India, the courts used to strictly enforce arbitration agreements, only allowing those who signed to participate. However, the Arbitration and Conciliation Act of 1996 changed this approach, leading to more open-mindedness and recognition of exceptional cases where non-signatories could be bound by arbitration. The Supreme Court’s decision in Chloro Controls
India (P) Ltd. v. Severn Trent Water Purification Inc.4 in 2013 was a significant milestone, introducing the Group of
Companies Doctrine in India. Subsequent cases like Mahanagar Telephone Nigam Ltd v. Canara Bank 5 further refined this doctrine by considering factors such as the non-signatory’s involvement in contract negotiation or performance, the
principle of single economic reality, and the threshold standard of prima facie determination during the referral stage.
Importance of the case Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc 2013 –
The decision in Chloro Controls caused a stir in Indian arbitration law as it went against the principles of party autonomy and express consent. The court incorporated the doctrine into Section 45 of the Arbitration and Conciliation Act, 1996, allowing non-signatory parties to be joined in arbitral disputes. Similar changes have been made to Section 8 of the Act for domestic arbitration. However, Section 2(1)(h) still excludes those claiming through or under the signatory from being considered a ‘party’ to the arbitration agreement. In addition, the case also established the various factors that should be taken into account when determining if a company within a group of companies is obligated by the arbitration agreement, which are as follows –
- The mutual intent of the parties,
- The relationship of a non-signatory to a party which is a signatory to the agreement,
- The commonality of the subject matter,
- The composite nature of the transactions, and
- The performance of the contract.
The court further explained that when establishing the legal connection between the signatory and non-signatory parties, it is essential to take into account various factors such as the existence of business relationships, significant organizational ties, and financial connections between them collectively rather than individually. Therefore, relying solely on the concept of a “single economic entity” is insufficient to apply the Group of Companies doctrine.
However, here are some examples of the cases where this doctrine has been applied –
- Cox & Kings Ltd. v. SAP India Pvt. Ltd. 2022 SCC Online SC 570
- Cheran Properties v. Kasturi and Sons Ltd (2018) 16 SCC 413;
- Ameet Lalchand Shah v. Rishabh Enterprises (2018) 15 SCC 678;
- Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited (2019) 7 SCC 62;
- Mahanagar Telephone Nigam Ltd v. Canara Bank (2020) 12 SCC 767; and
- Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises (2022) 8 SCC 42
From the above the Case Cox & Kings Ltd. v. SAP India Pvt. Ltd. has been discussed in detail below relating to the doctrine.
Cox & Kings Ltd. v. SAP India Pvt. Ltd. 2022
Date of Judgement: 6 May, 2022
Parties: Cox And Kings Limited (Petitioner)
Sap India Private Limited & Another (Respondents)
Judges: Surya Kant, N.V. Ramana
Facts:
On December 14, 2010, the Applicant and Respondent No. 1 signed an SAP Software End User License Agreement and SAP Enterprise Support Schedule. This agreement made the Applicant a licensee of specific ERP software developed and owned by the Respondent. In 2015, the Respondents recommended their Hybris Solution to the Applicant while they were developing their e-commerce platform. The Respondents claimed that the Hybris Solution would be 90% compatible with
the Applicant’s software, with only 10% customization needed, which could be completed in 10 months. The agreement was divided into 3 separate transactions. Despite various issues raised by the Applicant during project implementation until August 2016, the contractual framework for SAP Hybris Solution was terminated on November 15, 2016, due to the inability to fulfill the contract. The Applicant requested a refund of Rs. 45 crores paid for the License Agreement, Annual Maintenance Charges, and implementation services. Respondent No. 2 proposed a solution in response to the demand, which was rejected by the Applicant. After failed attempts to settle the matter, Respondent No. 1 issued a notice on
October 29, 2017, invoking arbitration for alleged wrongful contract termination and demanded payment of Rs. 17 crores. An Arbitral Tribunal was established to resolve the disputes between the parties. Later the case arose out of a reference made by a three-judge bench of the Supreme Court.
Issues:
- Can a non-signatory be included as a party in an arbitration agreement under the Act?
- Does section 7 of the Act enable the determination of an intention to arbitrate based on the parties’ conduct?
- Is the Group of Companies Doctrine recognized and applicable in Indian arbitration law? If yes, what are the circumstances and conditions under which it applies?
Judgment:
Examining all the facts of the case, the court noted the use of “claiming through or under” for successors in interest, indicating derivative rights in arbitration agreements. The Group of Companies Doctrine can bind non-signatories independently, regardless of this phrase. The doctrine, upheld in the Chloro Controls case, helps determine parties’ intentions in complex transactions while respecting autonomy. Judgments post-Chloro Controls are case-specific, requiring harmonious interpretation. Non-signatories can be bound by arbitration agreements under Sections 2(1)(h) and 7 of the Arbitration Act.
Furthermore, the Court emphasized the importance of maintaining separate legal identities of group companies when determining mutual intention in arbitration agreements. The alter ego principle cannot be used to apply the Group of Companies Doctrine, which is derived from a harmonious interpretation of specific sections of the Arbitration Act. To apply this doctrine, courts must consider all factors outlined in Discovery Enterprises, not just the idea of a single economic unit. The Court also rejected the interpretation in Chloro Controls that linked the doctrine to the phrase “claiming through or under,” stating it contradicts established contract and corporate law principles.
References
1 CIVIL APPEAL NO. 7134 OF 2012 on 28 September, 2012
3 ICC Award No. 4131, YCA 1984, at 131 et seq. (also published in: Clunet 1983, at 899 et seq.)
4 CIVIL APPEAL NO. 7134 OF 2012 on 28 September, 2012
